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Energy Prices Take Bite Out of Steel Industry

Posted on: Tuesday, 20 September 2005, 21:00 CDT

Sep. 21--Hurricane Katrina is circling back on the U.S. steel industry.

U.S. Steel yesterday warned it expects to report lower third-quarter profits than analysts are forecasting, citing rising prices for natural gas and scrap.

The news, along with the Federal Reserve's decision to increase short-term interest rates another notch, sent U.S. Steel shares down 5 percent. Other steel stocks joined the slide, paced by nonunion producer Nucor, which was off 4 percent.

Already high natural gas prices have shot up even more in the wake of the Katrina and scrap prices have nearly doubled since June, said Charles Bradford of Bradford Research. The developments have prompted producers to lower their earnings outlooks, institute raw materials surcharges, or both.

Wheeling-Pittsburgh Steel is imposing a $75-per-ton raw materials surcharge as well as a surcharge to cover higher gasoline prices trucking companies are paying to move steel to its customers. "The cost of scrap, natural gas and transportation that were already increasing have all risen dramatically since" Katrina, said Vice President Steve Sorvold.

Next month, AK Steel will start charging sheet steel customers $154 per ton to offset rising raw materials and energy prices. The Middletown, Ohio, producer said the higher costs will result in a third-quarter operating loss of about $20 per ton, not the $10 per ton profit it was previously forecasting.

Wall Street's consensus was that U.S. Steel would earn $1.44 per share from continuing operations. The company reported second-quarter net income of $245 million, or $1.88 per diluted share. It earned $354 million, or $2.72 per diluted share, in last year's third quarter.

The one bright spot for the company is its tubular operations, which make seamless pipe used to drill for oil and natural gas. The unit accounted for $133 million of the $413 million operating profit U.S. Steel reported in the second quarter and operations remain strong, the company said.

A sharp drop in steel prices caused by bulging inventories caused steel stocks to bottom out in June. They have risen since then, fueling hope for improved earnings.

Bradford has heard reports that hot-rolled sheet steel, a basic commodity product, is priced for $550 a ton for fourth quarter delivery vs. current prices of $480 to $520 and prices as low as $400 a month or two ago.

In Katrina's wake, the concern is how much rising costs will eat into projected profits. There's also worries high gasoline prices will crimp consumer spending on automobiles, appliances and other goods made with steel.

Shares in U.S. Steel -- which also said a blast furnace at its Gary (Ind.) Works will resume operation in December, a month behind schedule, because of repairs to a section of the furnace that was damaged during a Sept. 10 accident -- finished yesterday at $42.81, off $2.44.

Charlotte, N.C.-based Nucor, which was downgraded yesterday by Deutsche Securities to hold from buy, fell $2.55, closing at $56.96. Wheeling, W.Va.-based Wheeling-Pitt closed at $16.41, down 52 cents, and AK Steel fell 39 cents to $7.95.

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X, WPSC, AKS, NUE, DB, DBK,

Source: Pittsburgh Post-Gazette

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